Many young adults want a better life for themselves, a better future, new places to live in and build their lives secured from financial problems. That’s why they try to dive into the world of investments as it’s one of the smartest ways to grow your money and build a better future.
For beginners, knowing where to put the first brick can be overwhelming, but not impossible for sure. Two of the most popular paths to walk through are stocks and real estate, each with unique benefits, strategies and risks of course.
In this article we’ll explore each path separately, getting to know their pros and cons, which one to choose, how to start, where to start and will give some practical advise for those who are just getting started.
First of all, let’s see what stocks and real estate are.
What is a Stock and How Does It Work?
A stock is a share of ownership in a company, not a physical piece. When buying a stock you purchase a piece of that company and gain the right to a have a portion from its profits, usually through price appreciation (it’s when stock value goes up) and dividends (some companies pay a portion of profits to shareholders). It’s also important to mention that as the company’s value rises, so does the value of its stock.
How does it work?
Companies sell shares of their business to investors, they purchase those shares that we call “stocks”. What do we need to buy some? There are a few steps that need to be completed for a whole purchasing experience. So, to be able to buy stocks you’ll have to:
- Open a brokerage account – You’ll need a platform that can be either online or through a broker, where you can buy and sell stocks, for example Robinhood, E*TRADE or Fidelity.
- Deposit funds – You’ll have to transfer money into your brokerage account.
- Research companies– Get some information about the company’s financials, growth potential and market conditions of course.
- Place an order – You can buy a market order, which is the current market price or limit order, which is the case when the stock reaches a specific price.
- Monitor your investment – Track your stocks over time and decide when to sell or hold.
There are a few extremely important things that one should keep in mind while buying stocks.
- Stock prices go up and down – it means that they can change based on the company’s performance or market conditions.
- Diversification is key – It’s important to not put all the money you have into one stock, you would better spread it across different companies or sectors.
- Long-term vs short-term – Some investors buy stocks for long-term growth, while others trade more frequently
How to make money with stocks you may ask? There are two ways of doing so.
- Capital gains – selling the stock for more than you paid.
- Dividends – periodic payments made by some companies to shareholders
Getting to know about stocks is important, but we should have something to compare it to and see what it usually competes with in the world of investments. So, let’s explore a bit the world of real estate.
What is Real Estate and How Does it Work?
Real estate means owning land along with any structures or features that are permanently built on it.
There are a few types of real estate:
Residential- including apartments, houses, condos
Commercial- real estate are considered offices, warehouses, retail spaces
Industrial- distribution centers, factories
Land- that is agricultural or undeveloped land
You can buy houses, apartments from either owners or realtors.
Imagine that you’ve bought your real estate, so, what’s next? How to generate income from that? There are a few options you can consider:
Buying and selling – You buy a property at one price and sell it later at a higher price as its value increases.
Renting or Leasing – You can earn regular income by renting out residential or commercial property to tenants.
Real Estate Investment Trusts (REITs) – You can invest in a REIT, instead of buying property directly. Those own and manage real estate. You earn a share of the income without managing that property yourself.
There are several important points that need to be taken into account while just starting to invest in real estate.
Market shrinkage – Values of real estate can go up or down over time, influenced by economic conditions and interest rates.
Property location – Properties in high-demand areas often increase in value faster than those in less popular locations.
The experts of investment world say that buying and holding real estate will outperform stocks, but it has more hustle.
Research shows that both real estate and stocks offer various advantages and risks, and understanding them helps you make informed decisions.
We can surely say that while stocks offer liquidity and growth potential, real estate provides tangible assets and a stable income.
Let’s get further information about the advantages and disadvantages of these two spheres for beginners to know which of them suits their investment goals.
Stocks: Advantages and Disadvantages
Advantages:
Big Growth Possibilities : Stocks have always offered significant long-term returns, especially for companies with strong growth prospects.
Diversification : By investing in a mix of stocks across various industries and locations, investors can reduce risk. Even with a small budget, index funds and ETFs make it simple to achieve this variety.
Quick Cash Access : Stocks can be bought or sold with ease, giving investors fast access to their funds. This makes them more flexible compared to physical assets.
It’s a Source of Passive Income : Many stocks pay dividends, providing a stable income in addition to potential capital gains.
Disadvantages:
Ups and Downs in The Market : Prices of stocks can go up and down quickly. It can be caused by certain events or how people feel about the market, which can bestressful for investors.
Decisions made Impulsively : Continuous price changes can lead to impulsive buying or selling processes, which reduce long term returns.
Requires Certain Knowledge : To be successful in stock investing you should be able to complete research. It will help you understand financial statements and be aware of market trends.
Potential Losses : While stocks can grow, there’s no guarantee. Investors can lose part of all of their capital, especially if they pick individual stocks poorly.
Real Estate: Advantages and Disadvantages
Advantages:
Balanced Income: Renting property can ensure a regular cash flow for you, which can supplement other income sources.
Leverage : Investors can use a mortgage to buy a property by paying only part of the price beforehand. And it can help them earn more profit.
Tax Advantages : Many regions offer tax benefits for real estate, including deductions for mortgage interest, dedication and property expenses.
Tangible Asset : Real estate is a physical, tangible investment. It often provides a sense of security compared to paper assets like stocks.
Disadvantages:
High Upfront Costs : Buying real estate requires significant capital for down payments, closing costs and initial repairs.
Market Risk : Property values can shrink due to economic downturns or changes in neighborhood desirability
Ongoing Expenses: Property management, taxes and insurance add continual costs, and initial repairs.
Time and Effort : When you’re managing rental properties, you may come up with tenants’ issues and will have to dedicate a lot of time to it.
So, real estate can provide steady income and long-term growth. But it requires larger capital, effort and patience compared to stocks.
Factors to Consider Before Making a Decision
After carefully investigating the fields, beginners should take into account certain points before making a final decision of what to choose. Here are those factors.
The first thing is the budget. You should know how much you’re able to invest at the moment.
Risk tolerance comes next. You should understand if you’re comfortable with price fluctuations.
Knowledge and skills are important too. It’s important to know if you really understand the markets or property management.
Time commitment is another significant factor. You should decide for yourself if you prefer active investing or the off-hand type.
And the last but not least is understanding if you’re seeking quick returns or steady income over years.
When you know the answers to these questions and know all of the market trends and conditions, you can make a decision. When investing, make sure you prepare financially, because every field can experience shrinkages
So, what is the best option for beginners to invest with? Experts say investors will generally see higher growth in stocks, while real estate is an asset that can appreciate in value over time. But what to choose is you personal decision, based on your needs and expectations, so, if there’s a clear goal, you will find a way that suits you best.
Conclusion
Stocks and real estate are both great ways to grow your money. The best choice really depends on you. If you want something flexible and affordable to start with, stocks might be the way to go. If you prefer owning something tangible and want steady income, real estate may suit you better. Many smart investors actually use both, so their money grows in different ways.
You can buy a few houses, give them out for a rent and get money from three different sources, or you can buy stocks from different companies and follow up with their growth and develop your financial independence and role in the world of investments.
Choose the method that suits you best, trust the advisors who have been there for a long period of time and read lots and lots of literature regarding investments.
Good luck in every investment you decide to make. The key to success is knowledge and self-confidence.
